Understanding risk and uncertainty in supplier networks--a transaction cost approach

This study deals with managing risks in relationships between a larger final assembler and smaller suppliers. These relationships are often based on asymmetric cooperation where the smaller companies are highly dependent on the larger companies. This dependency can cause significant uncertainty for small and medium-sized enterprises that often operate with a narrow customer structure and minor negotiation power compared with their larger partners. The transaction cost approach (TCA) has been used as a framework for the analysis of uncertainties and risks related with these relationships. Despite the very comprehensive nature of empirical applications and theories of the transaction cost approach, these theories have not been very widely tested in the environment of small and medium-sized enterprises. Our study indicates that dependency and asymmetry are two major uncertainty and transaction cost causing drivers. Closer, long-term relationships are needed in order to minimize the transaction costs and risks. A smaller customer structure increases dependency and reduces partnership-specific transaction costs. The optimal strategy is to balance these opposite drivers. Options and linkages to the company's goals and strategies should therefore be the leading principles in balancing transaction cost uncertainty and risk. Empirical evidence from the electronics industry is presented. Alternative management approaches and further research areas are discussed.